Every so often I get together with an old classmate, and invariably we end up talking about grad school. Over time, we both have come to appreciate more and more the education we endured (which is what it felt like) at UCLA. There were some great professors – some that are well known in the field, others not so much – but I learned a lot from many of them.

Upon reflection, in some ways I can say I learned more from Arnold Harberger than from any other school teacher I’ve ever had. (An old, but still nice interview with Arnold Harberger.) I was lucky enough to have him on my committee, and I learned as much or more from talking to him outside of class than I did from the lectures.

(Two asides. Aside number 1: He would sometimes lecture by drawing interconnected diagrams on several different boards at once, so there were a few occasions where one had to make the choice between whether to copy things down or try to understand them. Aside number 2: Note that this admiration is one sided. My guess is that Harberger was disappointed with me, as I never pursued a career at the World Bank or the IMF, or otherwise went into Public Finance.)

The main thing I learned from him – and I haven’t seen or spoken to him in ten years or more, but I’m still learning this lesson regularly – is how much problems can be simplified. I’m pretty sure he didn’t have the training in math and statistics that many of the younger professors had, but he could cut to what was important and spot implications of the math and the stats that they could not.

But I was thinking of something else in the last few days. I’ve heard it said that Harberger was shortlisted for the Nobel a few times, but he will never win it. This is because though his body of work is Nobel quality, he spent an inordinate amount of time advising some very nasty regimes throughout the world.

Once, in his office, I asked him about his willingness to work with unsavory characters, not to say some really violent #@^&s. His response – I don’t remember his exact words – but it was something like this: “Say I provide advice to Pinochet. I think I provide good advice, and I think if he follows it, it makes the lives of the Chilean people better. If I don’t provide that advice, the Chileans are still stuck with Pinochet, but their lives are worse than they would be if I had provided the advice.”

About once a month or so, I think of that conversation. I’ve never been able to reach a conclusion about whether I think Harberger was right or wrong to work with folks like that. To me, its a tough call. Your thoughts?

It seems the National Review is accusing the Democrats of breaking their pledge:

And we wonder why people are cynical? Our friends on that side of the aisle didn’t make that many promises on the campaign trail; the highest profile ones were to clean up Congress, raise the minimum wage, and implement all of the Commission’s recommendations. They roasted their opponents for picking and choosing which ones they preferred; they insisted that only instituting all the recommendations demonstrated a serious commitment to protecting the American people. And now, we learn, that pledge was “crap,” as Murtha would likely put it.

So what is their evidence? Jonathan Weisman entitles his Washington Post article Democrats Reject Key 9/11 Panel Suggestion but his subtitle tells the real story: Neither Party Has an Appetite for Overhauling Congressional Oversight of Intelligence. And let’s check out what the National Review failed to mention:

It may seem like a minor matter, but members of the commission say Congress’s failure to change itself is anything but inconsequential.

Congressional oversight? Now there’s the key to stopping an Al Qaeda terrorist plot – NOT. Couldn’t there be at least some admission from the National Review that Republicans members of Congress are not that excited about this specific – and yes minor – matter? Now if Speaker Pelosi runs the House in the same rubber stamp, corrupt, and do nothing manner that Speaker Hastert did – we’ll have something to strongly criticize.

I’m sure this was covered before, either by PGL at this very blog, or by someone like Brad Setser, either of whom knows a lot more about this than I do. But for whatever reason, in the middle of the night I was thinking about the stories that seem to crop up now and again about the Euro, in particular how some of the big countries (especially Italy) have gotten themselves into a bit of trouble. Since they no longer have separate monetary policy from the rest of the EU, they can’t use looser monetary policy and/or a devaluation to spur the economy.

In the past, if, say, Italian workers were becoming less productive relative to Irish workers, the currency would eventually devalue, reducing the costs of hiring Italian workers. This can’t happen any more. The problem is such that every so often there are articles in the financial newspapers about how eventually Italy might be booted from the union.

But I was thinking… this is similar to the situation with the dollar. Its been a common currency in the US for a long time, and for much of that time, some parts of the country have surged ahead (California, New England) and some have fallen behind. (Note to reader Don Marek – its also similar to the Bretton Woods gold standard – when most countries peg their currency to the dollar, and the dollar is pegged to gold, nobody has flexibility any more.)

So why did the dollar last so long whereas there has already talk of problems with the Euro (to Don Marek again – and why did the Bretton Woods system last about thirty years) for years? (Note… the fact that the dollar is tanking relative to the Euro doesn’t mean the Euro doesn’t have problems.) Off the top of my head…

1. In the US, the states that have prospered subsidize the others. There is the famous transfer of federal funds from blue states to red states. That’s hard to pull off if, as with Italy in Euroland, the problem is with one of the very big states.2. Migration is relatively easy in the US compared to within Europe. Sure, a Portuguese citizenship lets you live in Germany, but it doesn’t mean you speak German, or that you will feel at home.3. The same problems did exist in the dollar zone, but its been a while, things have worked out, and I have forgotten them.4. There is no real problem in the Euro zone.

Which of these is it? Or is there another option? What is your opinion? (I lean toward 1 and 2.)

I have been toying with the idea of writing a book. I’ve never written a book before, but I have an idea trying to exit my chest, Alien-style. Since the idea extends from some of my Angry Bear posts, it seemed like a good idea to ask for input from you folks.

What I have in mind is writing a book that looks at how each of the last four Presidents, Reagan, GHW, Clinton, and GW, have performed along various measures. Some of these measures would be strictly economics: GDP, debt and the deficit. Some chapters would be semi-economic: production of food, energy, etc. Other chapters will not be directly related to issues most people think of as economics at all: abortions, unwed motherhood, education, etc. Regular readers might notice that by odd coincidence, some of these have been topics I’ve covered in posts.

In each case, my goal is to present the numbers in the most useful way possible. For example, I would try to explain why looking at GDP isn’t relevant, but rather, that one should look at real GDP per capita, and why. I would also try to explain why certain things might have happened, and how much the president really controls the topic at hand, but I want to skate over that as much as possible since that’s where biases creep in. For the most part, I intend to present the facts and figures in as unbiased a fashion as possible and let them speak for themselves.

While normally the use of facts and figures is guaranteed to bore actual readers and alienate potential figures, I think there is room out there for a book that simply tells it like it is.

What’s the purpose of the book? Well, people talk about the performance of presidents a lot but as often as not what they say bears little resemblance to what actually happened. Call this the kind of reference book that people can use to settle arguments – and perhaps start more rational discussions. While I think academics find the book interesting, I don’t intend it for an academic audience.

Why the last four Presidents? Well, Reagan, Clinton, and GW all seem to engender a lot of emotion, both positive and negative. (GHW not so much, but he’s in the middle of the sample so leaving him out is tough.) Each has supporters that exaggerate (whether inadvertently or not) their strengths, and detractors that exaggerate their weaknesses. Nobody much cares about Carter and Ford, and Nixon starts getting a little too far back.

Anyway, I’ve pulled a lot of the data I will be using for the book, and I’ve written first passes at some of the chapters. I’m trying to make it humorous, and keeping it to the level that a smart high school student could follow.

Before I proceed, I’m asking for your help. Is the concept behind the book a good idea? Would a book like this sell? Would you buy a book like this? What topics should be covered that you think I might miss? What steps should I take – other than writing the book of course – to get it to market? And what am I missing? I welcome your suggestions, comments, contributions, donations, threats, etc. Thanks.

The last time we “fixed” Social Security was 1983, when we followed the Greenspan Commission’s recommendations and raised Social Security taxes and cut back benefit growth. Social Security’s number crunchers declared the system solvent, but the problem wasn’t fixed. That’s because although the plan created temporary Social Security surpluses, they’ve gone to subsidize about $2 trillion of other government spending rather than being saved to pay future benefits. The problem is that the Social Security trust fund owns only Treasury securities. So when the system starts running a cash shortfall in a decade or so, it will ask the Treasury to redeem some of the securities in the trust fund. The Treasury will have to borrow the money to do that – which amounts to the Treasury borrowing to pay the benefits. Hence, the trust fund is useless.

Oh Lord – that old canard again! Let’s call Dean Baker up to the microphone:

Now, if Mr. Sloan understood how government bonds worked, he would know that they have value, that’s why people all over the world hold them and in fact are willing to hold them at a very low rate of interest. When Social Security starts drawing on the trust fund it will simply redeem its bonds at the U.S. Treasury, just as tens of millions of people, corporations, and banks have done over the years. Of course, the Treasury will need the money to repay these bonds, just like it need money to repay the bonds held by individuals, corporations, banks and foreign governments. The bulk of the money the Treasury gets to repay its bonds comes from individual and corporate income taxes. Now, if Alan Sloan had some basic understanding of how U.S. bonds work, he might want to point out that the debt of the government and the annual deficit are considerably larger than the conventionally used numbers which only refer to bonds held by the public (the debt an deficit are approximately $3 trillion and $200 billion larger, respectively). But, this is not an issue about Social Security financing, it is an issue about the general budget. If economics columnists knew how government bonds worked, perhaps the public would be better informed on budget issues.

Thanks Dean! Since Sloan began his discussion with the 1983 Reagan reforms, let’s remind him that the reason why the payroll contribution was increased so much was to build up a Social Security Trust Fund reserve to pre-fund as it were the retirement benefits of the baby boomers. We’ve been over this many times and I’m sure Mr. Sloan gets the point. So what is he really trying to say? That the Reagan and Bush43 General Fund deficits have made all Federal bonds worthless? If he really believes that, I’m be glad to take them off his hands for a few pennies on the dollar. Email me Allan – and we can cut a deal!

So what is Romney going to suggest? Just more tax cuts? That doesn’t make sense. After all, he doesn’t need those guys to sell it to the base, and most people’s memories aren’t so dim that they can’t remember what happened to their own incomes after Clinton’s tax hikes and after GW’s tax cuts.

But what else could it be? What sits in the black hat, waiting to be extracted by the Harvard Professor and the Business School Dean? Any thoughts?

The Pentagon is preparing an emergency spending proposal that could be larger and broader than any since the Sept. 11 attacks, covering not only the wars in Iraq and Afghanistan but extending to other military operations connected to the Bush administration’s war on terrorism. The spending plans may push the Defense Department into conflict with Democrats as they take control of Capitol Hill in January. Democrats had been planning to limit the emergency “supplemental” spending measures that have funded the wars in favor of the regular federal budget process, which affords greater oversight and congressional control. Congressional and military officials have said the Pentagon is considering a request of $127 billion to $150 billion in new emergency war spending, the largest such request since the special spending measures were begun in 2001. So far, Congress has allocated $495 billion for Afghanistan, Iraq and terrorism-related efforts. Even within the Pentagon, the spending request is generating controversy. The Pentagon was due to forward its request to the White House by about Nov. 15. But a senior Defense Department official said that the decision has been delayed and that Pentagon officials have asked Army and Air Force officials to provide more justification for their spending demands. The services have been pushing to increase the size of the supplemental appropriation in order to replace equipment, and they have argued that the overall military budget is too small given the demands on the armed forces … The next request stands to be larger partly because of new rules laid out in an Oct. 25 memo from Deputy Defense Secretary Gordon R. England. Rather than strictly limiting spending to Iraq and Afghanistan costs, the memo said the military services could include costs associated with operations that are part of the larger war on terrorism. Previously, the military portion of the supplemental spending measures has been used almost exclusively for operations in Iraq and Afghanistan. England’s memo would allow the military to include a greater number of expenses more loosely tied to the actual wars, such as new military weapons systems and training exercises. Critics of the Pentagon budget process say the memo has encouraged the services to inflate their requests. “The England memo basically said, ‘Let her rip,’ ” said Winslow Wheeler, director of the Straus Military Reform Project and a former congressional budget aide. “Anything goes, as long as you can put it under the pretext of not only Iraq or Afghanistan but the global war on terror.”

In a way, getting all of this on the table is a good thing as Speaker Pelosi will have a lot of fiscal messes to clean up now that the Hastert led Congress had abdicated all responsibility. And it stands to reason that there is a lot of rebuilding of the military to do in the aftermath of the Iraq fiasco. But there is also a tone that this is open season for military-laced pork barrel spending. If the White House is in favor of more defense spending – isn’t it reasonable for us to ask President Bush – how are we going to pay for this? Oh yea – another tax cut. Ahem!

Mark Thoma likes to critique Robert Samuelson when he gets a little goofy but this time Mark is highlighting a nice discussion from Mr. Samuelson (so I’ll resist my usual “no relationship to Paul” dig):

We may be about to shoot ourselves in the foot – or maybe the chest – on trade. In the name of “fair trade,” we may punish our own exporters. In 2005, worldwide exports exceeded $10 trillion. Since 1980, they’ve more than tripled while the overall global economy doubled. Like it or not, massive international flows of goods and services (aka “globalization”) underpin all modern economies. We can accept this reality and try to benefit from it. Or we can rail against it. We seem to be edging toward railing … Faster economic growth in the United States than in many of our major trading partners has stunted our exports and increased our imports. Likewise, the dollar’s role as the main global currency has kept its exchange rate high. Companies, individuals and governments hold onto dollars rather than selling. This makes U.S. exports more expensive and imports cheaper. To be sure, that puts U.S. factory workers and farmers at a disadvantage on world markets. The disadvantage is compounded when some countries (China) keep their currencies artificially undervalued. But there are also larger truths. One is that China’s surging exports have (so far) come mostly at the expense of other Asian countries. Another truth is that U.S. jobs are destroyed for many reasons – new domestic competition, new technologies, changing consumer tastes, the business cycle. A remarkable statistic: Every three months, 7 million to 8 million U.S. jobs disappear, and roughly an equal or greater number are created. Trade is a relatively minor factor in job loss. It is, however, an easy scapegoat. It enables critics to blame foreigners and suggest a solution – restrict trade. Globalization becomes a convenient explanation for many economic discontents, from job insecurity to squeezed living standards. Hence, trade obstructionism.

Some of us who advocate free trade recognize that the job market is not necessarily that great for everyone and we also recognize the fact that income inequality has increased. Thankfully Mr. Samuelson does not blame free trade for these problems.

Think about the fact that worldwide exports exceeded $10 trillion last year – which suggests someone also imported $10 trillion. While U.S. imports represented 20% of all imports, our exports were only 13% of worldwide exports. Mr. Samuelson has a nice list of why the dollar is overvalued, which makes our exports less competitive. All he left for me to add is the elephant in the room – those Federal deficits created by the spend and borrow policies heralded by a Republican Administration and Congress. I guess that’s why the GOP mascot is an elephant. Here’s hoping Speaker Pelosi spends more time cleaning up Bush’s and Hastert’s fiscal mess than she does pushing trade obstructionism.

In game theoretic terms, when the Dems officially take over Congress, GW’s options are basically:

1. Cooperate2. Fight3. A bit of 1 and a bit of 2.

What are early warning signs (say, in the first few months) that Congress is useful or useless, or that it is corrupt or relatively (for a Congress) clean?

With respect to useful or useless… there should be signs that have little to do with one’s politics. An honest liberal could find at least a few things to admire about Reagan and GHW, and an honest conserviate could find at least a few things to admire about Carter and Clinton. So what are signs that most people not in the fringes can agree upon?

With respect to corruption… I would imagine that most readers of this site are slightly left of center – that means, if anything, we should be more vigilant and concerned, not less, lest this group turn out to be a pack of vermin. (BTW… I’m already not encouraged… giving one of the ABSCAM boys a high profile is little different than giving one of the Keating 5 boys a high profile.)

Even if John Tamny thinks so. Much of his latest is just weird, but let me start with a canard we have heard from many others:

What’s odd is that given the chance to reform Social Security, and give Americans the option to direct their FICA dollars into private accounts that would include public-company stocks, the Democrats passed, instead using their opposition to bludgeon reformist Republicans at the ballot box.

Actually, Bill Clinton considered a plan where the Social Security Trust Fund would make that choice for us. Let me go back to an earlier version of a point I have made many times – often simply quoting Andrew Able in his March 2001 AER publication:

Some economists have argued that investing part of the Social Security Trust Fund in equity is simply a rearrangement of paper assets without any real allocational effects, and they have described such a policy as a “shell game.” The shell game argument is similar to the Ricardian equivalence proposition in public finance and macroeconomics and the Modigliani-Miller theorem in corporate finance. The argument is that private investors will react to any rearrangement of the social security system’s portfolio in a way that completely neutralizes the effect of the portfolio change. For example, if the social security system sells a dollar of bonds and purchases a dollar of equity, private investors would buy a dollar of bonds and sell a dollar of equity.

Or as I explained:

His paper considers the implications of a particular deviation from the perfect capital market model. To consider the perfect capital model, however, assume Joe has $300,000 in a private retirement account (PRA) and realizes that the government trust fund (GTF) is managing $200,000 for his benefit. Using the model from James Tobin’s “Liquidity Preference as Behaviour Towards Risk” (Review of Economics Studies, 1958), consider Joe’s choices are a risk-free bond with a 3% return and a stock portfolio with an expected return = 9% and a risk-index = 20. Imagine Joe’s preferences are such that he wishes to have half of his total retirement portfolio in stocks so his overall expected return = 6% and his overall risk taking is 10. Currently, GTF holds only bonds so Joe puts $50,000 of PRA into bonds with 80% of it in stocks. The Clinton idea was akin to taking one-fourth of the GTF and placing it into stocks so the expected return for GTF would rise to 4.5%. But Joe realizes that places his overall risk-index at 12 so even though his overall expected return rises to 6.6%, he is no longer optimally balancing expected return and risk. So Joe simply calls the manager of his PRA and asks that it now have $100,000 in bonds and only $200,000 in stocks. In other words, his entire portfolio including the GTF and the PRA would be half stocks and half bonds regardless of how the GTF is managed. Proponents of the Bush Social Security partial privatization plan wish us to believe that reducing the GTF from $200,000 to $150,000 and giving Joe the difference would induce Joe to hold more stocks. But if Joe was already optimally balancing expected return and risk, he would simply place this $50,000 in the bond portion of his PRA. Are the proponents of the Bush Social Security partial privatization plan telling us Joe was not already optimally balancing expected return and risk? If so, would not rational Joe have taken some of his PRA bonds and allocated them to stocks even before the partial privatization.

Blocking privatization did not prevent people from purchasing stocks through their 401(K) and had Bush succeeded with privatization, folks would have converted Trust Fund bonds into private holdings of government bonds. But Tamny’s rant is self-defeating in many ways:

The ten biggest fortunes in the U.S. are public fortunes in the sense that they are due to the rise of public-company stock owned by the ten richest people in the country … It’s mostly lost on Democrats that access to the stock market is the best and fairest equalizer of wealth.

Joe Sixpack living paycheck to paycheck wasn’t able to benefit from the rise in the stock price of Microsoft over the past 20 years, but watching Bill Gates gain billions makes it all better, I guess. In my view – the big controversy coming up will be whether to pay off the massive Federal debt with taxes on capital income or taxes on employment income. Tamny somehow believes taxing employment income rather than capital income will make Joe Sixpack better off.

Of course, Tamny also pulls out that free lunch supply-side canard – if we actually adopt fiscal responsibility by reversing those Bush tax “cuts” (aka deferrals), real GDP growth will suffer. I guess Tamny thinks the old Reagan “save and invest”, that is higher national savings leads to faster long-term growth, got things backwards. Or is it the case that Tamny’s brain was screwed on backwards when he wrote this?